«Empowering Workers: The Privatization Of Social Security in Chile by José Piñera is a series of distinguished essays on political economy and ...»
“Therefore privatization was not only one way to finance the transition but had several additional benefits such as increasing efficiency, spreading ownership, and depoliticizing the economy.” The new system also has eliminated the unfairness of the old system. According to conventional wisdom, pay-as-you-go pension schemes redistribute income from the rich to the poor. However, recent studies have shown that once certain income-specific characteristics of workers and of the operation of the political system are taken into account, public schemes generally redistribute income to the rich—and especially to the most powerful groups of workers.3 3See Baeza (1995) and World Bank (1994).
Conclusion It is not surprising that the PSA system in Chile has proven so popular and has helped promote social and economic stability. Workers appreciate the fairness of the system and they have obtained through their pension accounts a direct and visible stake in the economy. Since the private pension funds own a sizable fraction of the stocks of the biggest companies of Chile, workers are actually investors in the country’s fortunes.
When the PSA was inaugurated in Chile in 1981, workers were given the choice of entering the new system or remaining in the old one. Half a million Chilean workers (one fourth of the eligible workforce) chose the new system by joining in the first month of operation alone—far more than the 50,000 that had been expected. Today, more than 90 percent of Chilean workers who had been under the old system are in the new system. By 1995, 5 million Chileans had PSA accounts, although not all belonged to active, full-time workers, and therefore not all contribute in any given month.
The bottom line is that when given a choice, workers vote with their money overwhelmingly for the free market—even when it comes to such “sacred cows” as social security.
As the state pension system disappears, politicians will no longer decide whether pension checks need to be increased and in what “Only 15 years after the pension reform, Chile is running fiscal budget surpluses.” amount or for which groups. Thus, pensions are no longer a key source of political conflict and election-time demagoguery, as they once were.
A person’s retirement income will depend on his own work and on the success of the economy, not on the government or on the pressures brought by special interest groups.
For Chileans, Pension Savings Accounts now represent real and visible property rights— they are the primary sources of security for retirement. After 15 years of operation of the new system, in fact, the typical Chilean worker’s main asset is not his used car or even his small house (probably still mortgaged), but the capital in his PSA.
Finally, the private pension system has had a very important political and cultural consequence. The overwhelming majority of Chilean workers who chose to move into the new system moved into it faster than Germans going from East to West after the fall of the Berlin Wall.
“One of the key results of the new system has been to increase the productivity of capital and thus the rate of economic growth in the Chilean economy.” Those workers freely decided to abandon the state system even though some of the national trade-union leaders and the old political class advised against it. Workers care deeply about matters close to their lives, such as pensions, education, and health, and make their decisions thinking about their families and not according to political fashions.
Indeed, the new pension system gives Chileans a personal stake in the economy. A typical Chilean worker is not indifferent to the behavior of the stock market or interest rates.
Intuitively he knows that a bad minister of finance can reduce the value of his pension rights. When workers feel that they own a part of the country, not through party bosses or a Politburo, they are much more attached to the free market and a free society.
This is a brief story of a dream that has come true. The ultimate lesson is that the only revolutions that are successful are those that trust the individual and the wonders that individuals can do when they are free.
References Baeza, S. (1995) Quince Años Después: Una Mirada
al Sistema Privado de Pensiones. Santiago:
Centro de Estudios Públicos.
The Economist (1995) “Is Welfare unAsian?” February 11: 16–17.
Piñera, J. (1991) El Cascabel al Gato. Santiago:
Editorial Zig Zag.
Piñera, J. (1995) Sin Miedo al Futuro. Madrid:
World Bank (1994) Averting the Old Age Crisis.